The ATO’s crackdown on family trusts is about to get serious
If there’s one low-key but important battle to watch this year, it’s the one between the Australian Taxation Office and the beneficiaries of family trusts.
It’s been going on for a while, but now that the battle lines have been drawn, the rubber will really start to hit the road this week as trusts begin filing their annual returns at the end of the tax year. .
This filing will come on the heels of some very clear warnings from the ATO that they are looking for a range of ‘questionable’ behavior within trusts and will also come looking for accounting firms that have given advice that could have helped people avoid paying taxes.
Family trusts have long been used as a tool by the wealthy to efficiently pass income to beneficiaries who are in lower or zero tax brackets and also as a way to keep important assets like a farm intact for future generations. .
The trusts themselves generally pay no tax – which is paid under normal income tax rules by the person receiving the distribution – and by splitting the income between lower rate taxpayers, the aggregate amount of l tax paid can be significantly reduced.
What the ATO is cracking down on are a series of contrived schemes in which money flows to and from corporations, as well as money that is paid to children, who quickly reimburse their parents for the cost of their education.
Will the ATO go back to the past years?
There has been a lot of commotion among those with faiths about the crackdown, the very big fear being that the ATO will start going back in time to find this kind of behavior and then go through the usual enforcement of retroactive interest and penalties.
The ATO has denied it was a fishing expedition, but there is no doubt it wants to crack down on a range of practices that have accumulated over the years and revolve around payments to beneficiaries low or no taxes that accrue to high levels. tax individuals.
One of the examples they use is a family trust giving a college student with no other source of income an entitlement to $180,000, which would put him just below the top tax rate of 45%.
The student would then pay the $180,000, less any taxes paid, to his parents to “reimburse” the cost of his childhood.
In other words, the beneficiary of the trust didn’t actually get the benefit, but his parents did – using a potentially lower tax rate than their own.
Similarly, the ATO is looking for arrangements in which a trust pays money to a company it owns, which is then returned to the trust in the form of dividends – potentially fending off any tax payable by individual beneficiaries in the future.
Loans between companies and trusts are also scrutinized.
The ATO is also requesting the tax file numbers of all beneficiaries who will receive a distribution from a trust for the first time in the year 2022, with notices to be filed with the ATO by July 31, 2022.
The ATO also wants all trust distribution resolutions to be filed on the same date, with trust income subject to the highest marginal tax rate if this is not done.
Blind eyes won’t be closed from now on
This is a complex area spanning thousands of trusts, but what is clear is that over time a series of rather questionable practices have emerged within family trusts which greatly expand the idea income splitting so as to significantly reduce the income tax paid by the beneficiaries.
It remains to be seen how hard the ATO will strive to root out past botched practices – and how far they will go – but the clear warning is that they won’t turn a blind eye to whatever trusts are doing from From now.
In political terms, with the Albanian government seeking more revenue wherever it can find it, there will be very little sympathy for those who use trusts as a means of reducing tax bills.
In accountancy offices across Australia this week there will be a flurry of last-minute filings as trusts and their beneficiaries try to ensure they comply with what appears to be a much more regulatory regime strict for trusts.
What happens from now on – particularly how hard the ATO will go to crack down on trusts and their advisers who have failed to comply with the tougher new rules – will be a really interesting battle.